For Immediate Release 99-114
Day Trading: Your Dollars at Risk
(An Investor Alert)
Washington, DC, September 16, 1999
Day traders rapidly buy and sell stocks throughout the day in
the hope that their stocks will continue climbing or falling
in value for the seconds to minutes they own the stock,
allowing them to lock in quick profits. Day traders usually
buy on borrowed money, hoping that they will reap higher
profits through leverage, but running the risk of higher
losses too.
As SEC Chairman Levitt recently stated in his testimony before
the U.S. Senate, "[Day trading] is neither illegal nor is it
unethical. But it is highly risky." Most individual investors
do not have the wealth, the time, or the temperament to make
money and to sustain the devastating losses that day trading
can bring.
Here are some of the facts that every investor should know
about day trading:
* Be prepared to suffer severe financial losses
Day traders typically suffer severe financial losses
in their first months of trading, and many never
graduate to profit-making status. Given these
outcomes, it's clear: day traders should only risk
money they can afford to lose. They should never use
money they will need for daily living expenses,
retirement, take out a second mortgage, or use their
student loan money for day trading.
* Day traders do not "invest"
Day traders sit in front of computer screens and look
for a stock that is either moving up or down in value.
They want to ride the momentum of the stock and get
out of the stock before it changes course. They do not
know for certain how the stock will move, they are
hoping that it will move in one direction, either up
or down in value. True day traders do not own any
stocks overnight because of the extreme risk that
prices will change radically from one day to the next,
leading to large losses.
* Day trading is an extremely stressful and expensive
full-time job
Day traders must watch the market continuously during
the day at their computer terminals. It's extremely
difficult and demands great concentration to watch
dozens of ticker quotes and price fluctuations to spot
market trends. Day traders also have high expenses,
paying their firms large amounts in commissions, for
training, and for computers. Any day trader should
know up front how much they need to make to cover
expenses and break even.
* Day traders depend heavily on borrowing money or
buying stocks on margin
Borrowing money to trade in stocks is always a risky
business. Day trading strategies demand using the
leverage of borrowed money to make profits. This is
why many day traders lose all their money and may end
up in debt as well. Day traders should understand how
margin works, how much time they'll have to meet a
margin call, and the potential for getting in over
their heads.
* Don't believe claims of easy profits
Don't believe advertising claims that promise quick
and sure profits from day trading. Before you start
trading with a firm, make sure you know how many
clients have lost money and how many have made
profits. If the firm does not know, or will not tell
you, think twice about the risks you take in the face
of ignorance.
* Watch out for "hot tips" and "expert advice" from
newsletters and websites catering to day traders
Some websites have sought to profit from day traders
by offering them hot tips and stock picks for a fee.
Once again, don't believe any claims that trumpet the
easy profits of day trading. Check out these sources
thoroughly and ask them if they have been paid to make
their recommendations.
* Remember that "educational" seminars, classes, and
books about day trading may not be objective
Find out whether a seminar speaker, an instructor
teaching a class, or an author of a publication about
day trading stands to profit if you start day trading.
* Check out day trading firms with your state securities
regulator
Like all broker-dealers, day trading firms must
register with the SEC and the states in which they do
business. Confirm registration by calling your state
securities regulator and at the same time ask if the
firm has a record of problems with regulators or their
customers. You can find the telephone number for your
state securities regulator in the government section
of your phone book or by calling the North American
Securities Administrators Association at (202)
737-0900. NASAA also provides this information on its
website at www.nasaa.org.
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